Rev. Rul. 69-244

The purpose of this Revenue Ruling is to update and restate under current statute and regulations the position set forth in I.T. 3805, C.B. 1946-1, 120.

The question presented is whether Federal income tax is required to be withheld at the source under sections 1441 and 1442 of the Internal Revenue Code of 1954 with respect to dividends that are designated by a regulated investment company as capital gain dividends, in accordance with the provisions of section 852(b)(3)(C) of the Code, when such dividends are paid to nonresident alien individuals and nonresident foreign corporations.

Section 1441 of the Code provides, in pertinent part, that all persons, in whatever capacity acting, having the control, receipt, custody, disposal, or payment of interest, dividends, rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, to the extent that any of such items constitutes gross income from sources within the United States, of any nonresident alien individual shall deduct and withhold from such items of income a tax equal to 30 percent thereof.

Section 1442 of the Code provides, in pertinent part, that in the case of foreign corporations subject to Federal income taxes there shall be deducted and withheld at the source in the same manner and on the same items of income as is provided in section 1441 of the Code a tax equal to 30 percent thereof.

Section 852(a) of the Code provides, in part, that provisions of the Code relating to regulated investment companies shall not be applicable to a regulated investment company unless the deduction for dividends paid, as defined in section 561 of the Code but without regard to capital gain dividends, for the taxable year equals or exceeds 90 percent of its investment company taxable income for the taxable year, and the company complies for such year with regulations prescribed by the Secretary or his delegate for the purpose of ascertaining the actual ownership of its outstanding stock.

Section 852(b)(3)(B) of the Code provides that a capital gain dividend shall be treated by the shareholders as a gain from the sale or exchange of a capital asset held for more than 6 months.

Section 852(b)(3)(C) of the Code defines a capital gain dividend to mean, in general, any dividend, or part thereof, which is designated by the company as a capital gain dividend in a written notice mailed to its shareholders not later than 45 days after the close of its taxable year.

Section 1441(b) of the Code provides that amounts designated as capital gain under section 402(a)(2) of the Code, relating to treatment of total distributions from certain employees' trusts; under section 403(a)(2) of the Code, relating to treatment of payments under certain employee annuities, under section 631(b) and (c) of the Code, relating to treatment of gain on disposal of timber, coal, or domestic iron ore with a retained economic interest; and under section 1235 of the Code, relating to treatment of gain on sale or exchange of patents are specifically subject to withholding. The inclusion of the above items in section 1441(b) of the Code was the result of an amendment made in such section incident to the general revision of income tax laws under the Internal Revenue Code of 1954 and subsequent Revenue Acts. The fact that Congress required withholding on the above items which are considered to be capital gains and omitted such requirement with respect to capital gain dividends indicates that withholding on capital gain dividends was not intended by Congress.

Accordingly, dividends that are designated by a regulated investment company as capital gain dividends under section 852(b)(3)(C) of the Code do not constitute fixed or determinable annual or periodical income within the meaning of section 1441 of the Code, and such dividends are not subject to withholding of tax at the source under sections 1441 and 1442 of the Code when paid to nonresident alien individuals and nonresident foreign corporations.

I.T. 3805 is superseded since the position set forth therein is restated under current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.